IR35 – Why did Dragonfly Consulting get it wrong?

Retro Drama Woman

Dragonfly Consulting was a one man consultancy business, the one man being Mr John Bessell and his client was the AA (Automobile Association). It was landmark case in IR35 which was concluded in 2008 when HMRC won the case and claimed £99,000 in unpaid taxes and National Insurance.

First lets get Mike and Jeff to explain the basics of IR35 and employment status….

The key points being:

  1. Personal Service and Substitution
  2. Control
  3. Mutual Obligation

So let’s pick out the key points in the Judgement:

1. Personal service / substitution.

Mr Bessell was named as the Consultant in two of the lower level agreements; however the fact that his name was omitted from the other lower level agreements did not undermine the requirement for his personal service. Henderson J found that Dragonfly was a one-man company, whose raison d’etre was to supply Mr Bessell’s services – therefore it was obvious that the intention of both parties was that it would be Mr Bessell who would provide the services.

The existence of a clause in the lower level agreement demonstrating that a substitute could only be used where the AA had expressly agreed it, and the oral evidence given by AA’s representatives regarding substitution, resulted in Henderson J concluding that the findings of fact were unassailable – amply justifying the Special Commissioners conclusion that each notional contract would have been for the services of Mr Bessell, and that a substitute could be used only if the AA had firstly given notice that a particular substitute was acceptable.

2. Control

Henderson J agreed with the Special Commissioner that a schedule supporting the first lower level agreement demonstrated that the consultant provided by Dragonfly was to act under the direct supervision and control of the AA.

3. Intention of the parties

Henderson J summarised the position, acknowledging that statements by the parties disavowing any intention to create a relationship of employment cannot prevail over the true legal effect of the agreement between them.

It was accepted that, in a borderline case, a statement of the parties intention may be taken into account and may help to tip the balance one way or the other, however in the majority of cases such statements will be of little, if any, assistance in characterising the relationship between the parties.

whether the engagement was one of service or for services – therefore the hypothetical contract would not have included a statement of the intention of the parties. Even if it was found such a clause were to be included in the hypothetical contract, this could not by itself result in reach the opposite conclusion about Mr Bessell’s notional status as an employee.

4. Worker status.

The appellant contended that the Special Commissioner failed to consider a third intermediate category – that of ‘worker’.

Henderson J confirmed the general law of employment does not recognise a third intermediate category between employment and self-employment; therefore there was no reason why the Special Commissioner should have considered any other category. In the context of IR35 the only distinction to be made is whether the notional contract is one of service or not – and the Special Commissioner clearly had that in mind.

Henderson J concluded by stating that for the reasons given in his judgement the conclusion that Mr Bessell fell on the employment side of the line is unassailable.

The lessons we can learn from this are:

  • The contractual paperwork must be correct at every stage
  • Paperwork on its own is not enough and commercial reality may take precedence